HG Alert: An important reminder for all franchisors - Jun 2009

Recent court action taken by the Australian Competition and Consumer Commission should serve as a timely reminder to franchisors of the obligations they owe to franchisees and potential franchisees under the Franchising Code of Conduct. The Commission took court action in relation to alleged breaches of the Franchising Code of Conduct and the ‘unconscionable conduct’ provisions of the Trade Practices Act.

The Franchising Code of Conduct is a mandatory code of conduct that has the force of law under the Trade Practices Act 1974. It applies to franchise agreements entered into, renewed or extended on or after 1 October 1998.

The purpose of the Code is to regulate franchising participants’ conduct towards each other, and to ensure that franchisees are well informed about a franchise before entering into it. The Code also provides a cost-effective dispute resolution scheme for franchisees and franchisors to resolve disputes.

The Code defines “franchise agreement” very broadly, and this broad definition is perhaps the most important feature of the Code. The definition is wide enough to catch agreements that previously would not have been considered a franchise agreement, including some distribution agreements, motor vehicle dealership agreements and software licensing agreements.

Under the Code, franchisors must provide a prospective franchisee, or a franchisee proposing to renew or extend a current franchise agreement, with a disclosure document, a copy of the Code and a franchise agreement at least 14 days before the franchisee enters into, renews or extends the agreement, or pays a non-refundable deposit in relation to the agreement.

The purpose of this requirement is to provide potential franchisees with the information they need to make an informed decision, and to give existing franchisees current information from the franchisor that will help them run the franchise.

The Code also sets out the franchisee’s rights and obligations in relation to a franchise agreement - for example, the right to terminate the franchise agreement in certain circumstances, and the prohibition on franchisors trying to prevent franchisees from forming a franchisees’ association for certain purposes.

What is the Australian Competition and Consumer Commission’s role?

The Australian Competition and Consumer Commission’s role is to help people understand their rights and obligations under the Code and the Trade Practices Act. The Commission does this by developing and distributing educational material through its outreach programs in each state and territory.

The Commission also has a role in investigating potential breaches of the Code and is responsible for enforcing the Code when a breach occurs.

Ongoing investigations

The Commission has recently taken a renewed interest in Franchising Code of Conduct matters. It has begun proceedings in the Federal Court of Australia against two companies for alleged breaches of the Code.

Allphones Retail Pty Limited

The Commission alleges that Allphones engaged in misleading or deceptive conduct towards potential and current franchisees by misrepresenting the way in which it operates its franchise system, in particular misrepresenting the way in which profits are shared with franchisees.

The Commission also alleges that Allphones engaged in unconscionable conduct, which included forcing franchisees to bow to Allphones’ demands by threatening or engaging in harsh conduct towards franchisees, and failing to disclose or pay certain income to franchisees.

On 19 January 2009, the Federal Court granted an injunction until trial, which prevents Allphones from indicating to franchisees that it plans to prefer the interests of franchisees operating under the new franchise agreement when allocating stock to its stores. The matter is awaiting a final decision from the court.

Seal-A-Fridge Pty Ltd

The Commission alleges that Seal-A-Fridge engaged in unconscionable conduct towards its franchisees by, amongst other things, unreasonably withholding its consent to the transfer of franchises, and disconnecting franchisees from the national Seal-A-Fridge telephone number to force them to agree to increased fees for services associated with that number. Mr Nigel Rooney, a director of Seal-A-Fridge, is also alleged to have knowingly participated in the alleged breaches.

The Commission also alleges that Seal-A-Fridge had breached the Franchising Code of Conduct by failing to provide adequate disclosure to potential franchisees, and failing to provide current disclosure documents to franchisees despite written requests for such information.

For more information

For more information about complying with the Franchising Code of Conduct and the Trade Practices Act, or about the court action taken by the Australian Competition and Consumer Commission, please contact HopgoodGanim’s Competition and Trade Practices team.